Tax in March 2014
Much as we predicted, the 2014/2015 Budget Speech was rather uneventful in terms of major changes being announced. However, two of the topics highlighted in this edition of e-taxline were specifically mentioned in the Budget Speech and although the issues were not clarified, they have been raised to receive attention in the near future.
The first is the Research and Development (R&D) allowance. Despite the changes announced in the Budget Speech and a spate of other significant changes to the allowance, it still appears to fail to encourage many companies to undertake R&D. Barry Visser, Associate Director at Grant Thornton Johannesburg, describes what is still missing and how companies can benefit from the allowance as it stands now.
The second relates to the requirements for claiming VAT when importing goods to South Africa. Basil Dikobe, Tax Manager at Grant Thornton Johannesburg, explains that despite South Africa being a significant importer of goods from foreign sources, the documentary evidence to claim import VAT is unclear, and often the cause of contention. Minister Gordhan proposed that clarification regarding the requirements be provided. However, until that happens, Basil has provided some practical tips to simplify the process for local businesses who want to claim import VAT easily and correctly.
Staying on the topic of international trade, the introduction of withholding tax on interest on loans from non-residents will affect both the lender and the South African taxpayer. While this withholding tax of 15% will only become effective from January 2015, affected companies will have to do some significant planning to accommodate the changes. Mike Betts, Tax Partner at Grant Thornton Cape, describes what taxpayers need to know and how prepare for the pending changes.
Then, moving on to a more social issue, Doné Howell, Tax Partner at Grant Thornton Johannesburg looks at the concessions to the deductibility of donations that became effective on 1 March 2014. She clarifies how to become an expert at donating by knowing who to donate to, how much and when and still earn a tax deduction.
By Barry Visser, Associate Director Grant Thornton Johannesburg
Recent Research and Development (R&D) legislative amendments substantially changed the nature of the R&D allowance contained in section 11D of the Income Tax Act. However, despite the significant changes, this allowance still seems to fail to encourage many companies to undertake R&D. We highlight the most significant barriers and provide suggestions to benefit from the allowance.
It was generally welcomed that the initially proposed requirement that the R&D in South Africa should be “world-beating” in order to qualify for the tax allowance, did not find its way into the final legislation. However, there are various other amendments where clarity is still required or amendments are proposed.
The word “innovative” has been inserted, but without its own definition. This leaves the word open to subjective interpretation. This interpretation was previously left to the discretion of the Minister of Science and Technology; however, a clear definition is required.
The insertion of the term “functional design” is considered to be limiting. Effectively, only designs with a functional purpose will now qualify, thereby excluding designs where it may be difficult to distinguish between aesthetic or functional purposes.
The replacement of the words “developing or significantly improving” with “making a significant and innovative improvement to” implies that only a successful research project will qualify. It disregards that R&D by its very nature involves trial and error, and where there is error a research project may not necessarily result in an innovative or significant improvement. We suggest that the reintroduction of the word “developing” should be considered.
However, what was made clear under the excluded activities section – which was previously separately listed but is now included as part of the R&D definition – is that internal business processes for sale or granting of right of use to connected parties, is not permissible.
One amendment that came through as a surprise is that previously 100% of qualifying expenditure could have been claimed with no approval and only the 50% uplift allowance required pre-approval by the Department of Science and Technology (DST). Now, the full 150% requires approval and it should be noted that only R&D expenditure incurred after receipt of the approval by the DST may be claimed. This means much more administration, especially where a company was previously satisfied with not claiming the 50% uplift allowance. It will require careful planning not to miss the potential deduction on expenditure incurred prior to application to the DST.
3rd party carrying on R&D on behalf of taxpayer
In the absence of addressing practical problems encountered in this area, we welcomed the announcement in the recent Budget Speech, that the unintended consequences for entities funding research and development activities carried out by another party will be removed retrospectively from 1 January 2014.
Minister to designate deemed R&D activities
The Minister of Finance, in consultation with the Minister of Science and Technology, may prescribe special R&D criteria by regulation.
In this regard there is a special dispensation, for example for the pharmaceutical (generic medicine and clinical trial) industry and in the recent Budget Speech it was further proposed that the barrier to the first three phases of clinical trials being eligible for the R&D allowance will be removed retrospectively from 1 January 2014.
The aim of the R&D allowance must be to encourage investment in R&D across all industry sectors and not only to promote some. However, further clarity is required regarding the intention of the activities that should be included as well as the industries that are targeted for the R&D incentive. We propose that broad-based consultation, to include all industries, needs to take place.
In the meantime, we recommend that companies investing in R&D activities submit applications to receive the deduction on qualifying expenditure. Contact Grant Thornton for help to complete the application.
By Basil Dikobe, Tax Manager, Grant Thornton Johannesburg
The requirements for claiming VAT when importing goods to South Africa have always been contentious and the affected VAT vendors are often unsure about the documentary evidence they need to retain to survive a SARS VAT audit. Even SARS offices interpret or enforce the provisions of the VAT Act differently. For example, some allow the clearing agent’s invoice as proof of import and others accept payment to the clearing agent as proof that VAT has been paid. Even the timing for claiming the input tax deduction has been disputed. These uncertainties have resulted in many VAT vendors receiving significant assessments, penalties and interest charges from SARS.
However, pending changes to the requirements will now further restrict the options available to vendors wishing to claim import VAT.
Current requirements for claiming import VAT
The VAT Act currently provides that a vendor can only claim import VAT in respect of goods imported to South Africa, when the goods have been invoiced or paid, whichever is the earlier, during that tax period.
The documentary evidence required to claim import VAT includes the bill of entry or other document prescribed in terms of the Customs and Excise Act, together with a receipt proving that the necessary tax was paid in respect of the said import.
In practice, vendors proof to SARS is their proof of payment to their clearing agent, trusting that the agent has indeed paid the required amounts to SARS. However, this practice is actually not sufficient as documentary evidence.
Clearing agents are generally reluctant to provide a copy of their statement of account to vendors, as it contains confidential information regarding all its other clients’ imports. However, some clearing agents provide statements to vendors that show when the VAT on the specific import was paid to Customs, and this is generally accepted by SARS.
These documents should be in the possession of the vendor or its agent, at the time the return is submitted.
In essence, this practice allowed vendors to import goods but defer the VAT and Customs payments until the time that the vendor submitted its return to SARS. Vendors could thus claim the VAT in one tax period while the clearing agent only paid Customs via its deferment account in the next tax period, but before the vendor submitted its VAT return.
New timing rules
However, a recent change in VAT legislation will affect businesses importing goods to South Africa as it even further limits the period when import VAT can be claimed.
From 1 April 2014, import VAT can only be claimed during the same tax period when the goods were imported and the same period when VAT is paid to Customs. It means that when vendors using the services of a clearing agent that only pays the import VAT to Customs in the next tax period via its deferment scheme, they can only claim the import VAT during the tax period in which the clearing agent pays the required VAT to Customs.
Clarification of documentary evidence
The documentary evidence requirements remain the same as before for now. However, the Minister of Finance proposed in his 2014/2015 Budget Speech that clarification will be provided on the documentary evidence that will be acceptable to claim the import VAT. Until this issue is clarified, there is a potential risk that vendors might not have sufficient documentation to support the input tax deduction on imported goods, resulting in SARS raising assessments, penalties and interest.
We recommend that vendors ensure that after 1 April 2014, they only claim the import VAT in the tax period when the VAT has been paid to Customs and that they obtain at least the SAD500 form, the Customs release notification and proof that the clearing agent has paid the VAT to Customs.
By Mike Betts, Tax Partner Grant Thornton Cape
From 1 January 2015, the interest paid or due to non-residents from a source within South Africa (SA) will be subject to a 15% withholding tax, according to sections 50A to 50H of the Income Tax Act (‘the Act’). These provisions do not affect interest paid by, amongst others, any sphere of government, or any SA bank and will most likely affect loans from foreign shareholders and from other group companies located beyond the borders of SA.
The effect on non-resident persons
The withholding tax doesn’t apply in respect of interest paid to a non-resident natural person who has been physically present in SA for more than 183 days in aggregate during the twelve month period preceding the date of payment. It is also not applicable if the loan in respect of which the interest is paid exists to establish that foreign person in SA permanently and that the person is a registered SA taxpayer. In these instances however, the foreign person will not enjoy the exemption in terms of section 10(1)(h) of the Act and will be subject to normal income tax on the interest.
To benefit from the withholding tax exemption, the non-resident person will need to submit a prescribed declaration confirming that the person qualifies for the exemption before the date of payment or another date that can be determined by the person paying the interest. If the foreign person is entitled to a reduced rate of tax through the application of a double taxation agreement (DTA), then a prescribed declaration, within similar time limits, is required together with a written undertaking to advise the borrower of any subsequent change in status.
If the DTA concerned prohibits the withholding of tax in SA, the provisions of the newly introduced Section 23M will require a specific calculation which is likely to result in the deferral of at least portion of the interest deduction in the hands of the borrower where this person is in a controlling (connected person) relationship with the non-resident lender.
In order to comply with these requirements in full by 1 January 2015, consider the following advice:
- Make the foreign lender aware of these requirements;
- If the foreign lender is a natural person, ensure the time he or she spends in SA is properly monitored and that procedures are put in place to ensure the necessary exemption declaration is received timeously if the 183 day threshold is breached;
- If the loan is effectively connected with the permanent establishment of the foreign lender in SA, ensure the necessary exemption declaration and proof of registration as a taxpayer in SA are in place;
- Examine any DTA between SA and the foreign jurisdiction and if relief from the withholding tax is stipulated or provision is made for a reduce rate of tax, ensure the necessary declaration and written undertaking to advise the borrower of any change in status are in place;
- If full relief from the withholding tax is stipulated in the DTA, determine whether the foreign lender is a connected person and, if so, understand the calculation of the interest deduction that will be required;
- Formalise the loan arrangements if no loan agreement exists and obtain exchange control approval;
- Review any existing loan agreement and consider all amendments that may be appropriate to:
- Regulate the timing of interest payments. Monthly interest payments may result in excessive administrative work to meet withholding tax payments that fall due at the end of the next month after the interest is paid. This will also require continuous calculations for determining periods of physical presence in SA, if the foreign lender is a natural person. In the case of annual interest payments with an anniversary arising after 31 December, consider making an early payment on or before 31 December 2014 to minimise exposure to the withholding tax.
- Comply with the revised transfer pricing and thin capitalisation rules for which purpose an arm’s length character needs to be demonstrated for both the level of funding and the interest charged thereon.
- Comply with all current exchange control regulations. These include a maximum interest rate equivalent to the prime lending rate in the case of shareholder loans. This may not necessarily coincide with an arm’s length rate of interest for transfer pricing purposes.
- Seek our expert advice to ensure compliance and minimise administration problems.
By Doné Howell, Tax Partner Grant Thornton Johannesburg
“Social responsibility is an ethical theory that an entity, be it an organisation or individual, has an obligation to act to benefit society at large.”
When your moral compass and sense of social responsibility lead you to acts of benevolence, you could, in addition to the sense of wellbeing that comes from helping others, also qualify for a reduction in your tax bill. In recognition of the valuable role these donations from individuals and businesses play in these tougher economic times, government has legislated further concessions to allow greater tax relief in respect such donations.
Generally, donations made to organisations established to carry out public benefit activities will qualify as a tax deduction. However, donations made or transferred on or after 1 March 2014 will also benefit from the following concessions:
To whom can you donate? Qualifying organisations
- You will only qualify for a tax deduction if your donation was made to approved public benefit organisations and certain qualifying institutions (‘approved organisations’).
- There are numerous regulations that determine whether an organisation qualifies as approved organisations. If you wish to qualify for a tax deduction, you need to establish if the beneficiary of your donation can issue a receipt as intended under section 18A of the Income Tax Act, No. 58 of 1962 (‘the Act’).
How much can you claim as a tax deduction?
- Taxpayers – natural persons, trusts, companies, or close corporations – can deduct from their taxable income, the amounts they donated to approved organisations, up to the value of 10 percent of their taxable income.
- For natural persons, the term taxable income refers to the taxpayer’s taxable income, whether derived from trade or from a non-trading source, and after allowing all permitted deductions, but before this donations deduction. Taxable income excludes any retirement lump sum benefit, retirement lump sum withdrawal benefit and severance benefit. However, it includes taxable capital gains.
- The donation must actually be paid or transferred during the year of assessment in order to qualify for a tax deduction in such tax year.
An incentive to give more now. Roll over treatment of excess
- As from 1 March 2014, any donations in excess of the 10 percent limit will be rolled over and carried forward to the succeeding year of assessment. It will thus be deemed a donation actually paid or transferred during the succeeding year.
- This rollover treatment will continue to apply in respect of any future excesses.
More ways to give. Payroll giving
- Your donation can also reduce your monthly employees’ tax (‘PAYE’), if your employer agrees to process such through its payroll.
- Essentially, any donation made, limited to five percent of your salary (subject to certain allowable deductions) can be deducted from your salary before PAYE is calculated. However, these requirements must also be met:
- The beneficiary must be an approved organisation;
- The donation amount is deducted from your salary and paid to the approved organisation on your behalf;
- The approved organisation must issue the section 18A certificate to your employer;
- Your employer must reflect the full amount of the donation, not only the five percent, on your IRP5 certificate.
- The IRP5 certificate will suffice as the supporting documentation required to claim the tax deduction on your annual tax return.
What else can you give and how will it work? Donations other than cash
- Your donation can be in the form of cash or property in kind.
- If you donate property in kind and it qualifies for the section 18A deduction, the deemed donation amount will be dependent on whether the donation is in the form of trading stock, trading assets or other assets.
- If the donation is in the form of immoveable property, which is of a capital nature, and the cost does not exceed the lower of the market value or municipal value, the deemed donation will be calculated according to a set formula.
What else should you know?
- If you donate to any organisation that does not qualify as an approved organisation, you (the donor) are liable to pay donations’ tax at a rate of 20 percent on the value of such donation.
- However, there are various exemptions to this, including inter alia:
- Donations by natural persons: up to R100 000 per year
- Donations by all other persons: up to R10 000 per year
- Donation between spouses
- Furthermore, if you donate an asset to a tax exempt entity, you must disregard any capital gain or capital loss determined in respect of such donation.
- Donations to foreign organisations will not qualify as a tax deduction in determining your normal tax in South Africa.
These new concessions provide more opportunities for taxpayers to have control over the good their money can do in the broader society. With some planning and goodwill, it can truly result in a win-win outcome for all.